As more residential or commercial property owners in requirement of liquidity usage ground leases to open capital, genuine estate financiers might reap the benefits.

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Numerous openly traded realty trusts (REITs) have actually faced obstacles in the past year, with returns mostly tracking stock exchange indexes. But REITs that are focused on ground leases - owning the land without owning the buildings that sit on it - have actually been an exception.

Splitting the ownership of commercial land from the structures that rest on it isn't a brand-new idea. In some ways, it's the very same monetary structure that middle ages royalty utilized with its subjects. But the democratization of ground leases and their growing appeal is reflective of other type of securitization throughout the economy - creating narrower and more focused return attributes to match the requirements of various classes of investors.

And with business workplace property, in particular, in a prominent state of post-lockdown turmoil, the ability to develop a de-risked real estate asset has actually been warmly welcomed by financiers.

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At present, Safehold (SAFE) is the sole publicly traded ground lease REIT pure play. It will likely be one of several on the marketplace in the coming years, prompting other more traditional REITs to diversify their holdings with land leases.

We've currently seen this with a mega-deal involving Real estate Income and Wynn Resorts. In a transaction valued at $1.7 billion, Wynn Resorts sealed a sale/leaseback plan with Real estate Income, a conventional REIT, for its Encore Boston Harbor development, a hotel, casino and theater project 6 miles south of Boston.

Unlocking capital when in need of liquidity

Residential or commercial property owners are using ground leases to open capital in areas where liquidity is lacking. With local banking tightening up financing - even with the specter of lower rate of interest - we are now seeing land lease inquiries shoot up. In my own land lease specialty practice, we are fielding more queries from owners and developers in all realty sectors.

One requires to only take a look at numbers touted by Safehold. Tim Doherty, Safehold's head of financial investments, said in a press release that the company has actually expanded land lease offers from 12 in 2017 to 130 in 2022, with the worth of the portfolio at more than $6 billion. He attributed the development to a brand-new level of sophistication in the land lease market, adopting methods such as predictability of lease payments, a relocation that leads to more effective pricing. Over the last three months of 2023, Safehold stock was up nearly 40%.

Growing popularity of ground leases has not gone undetected. Three years ago, Dallas-based Montgomery Street Partners began a $1 billion REIT targeted on investments in the country's top 50 markets. High interest from institutional investors triggered Montgomery Street to expand the pool to $1.5 billion in 2022.

Murray McCabe, a handling partner of Montgomery Street Partners, stated in a press release, "The strong demand we have actually seen for GLR's (ground lease REIT) follow-on equity offering confirms our technique and verifies that ground leases have actually progressed to end up being an appropriate and traditional financing tool."

Clearly, ground lease financial investment funds are one of the emerging patterns in property. Ares Management and realty personal equity company The Regis Group formed Haven Capital in 2020 to record growing land lease need to, in their words, supply "a more effective type of financing" that assists unlock property value.

These recent advancements, together with total funding patterns within the genuine estate industry, develop a pattern that's hard to ignore: Land lease activity, which has actually grown to a more than $18 billion market in 2022, will only see more offers announced over the next 10 years. By one quote, the market might be near to $2.5 trillion in the United States alone, supplying a substantial runway for expansion.

How does a land lease work?

Long a staple of family workplaces searching for a steady income and foreseeable stream from long-held vacant parcels in preferable locations, the land lease has actually ended up being extensively welcomed because the automobile presents a win-win scenario for both the building owner and the landowner.

How does a land lease run? Typically spanning a term of 50 to 99 years with renewal options, a land lease REIT or sponsor acquires the land from the building owner. This plan enables the developer to launch essential capital, directing it toward locations with greater return capacity. Simultaneously, the structure owner retains full control of the possession while divesting the land underneath it, which, though helpful in the development procedure, supplies little return to the total project. The lease is tailored to fit the project.

The Boston Harbor Development acts as an illustration of the long-standing use of land leases in the hospitality industry. Additionally, this technique has discovered appeal in retail, health and wellness facilities and fast-food outlets. Now, different markets are acknowledging the worth of this idea. Ground lease payments consist of fixed yearly lease increases.

" Proof of principle continues to spread," Safehold's Doherty stated.

As the benefits to a task's capital stack ended up being easily evident, ground leases will gain broader approval and be regularly utilized as a crucial element in the property industry. Predictions recommend that ground leases will become mainstream within the next 5 to 10 years, offering a spectrum of financial investment chances for astute gamers.

Related Content

Bright Spots Amid Commercial Property Struggles.

REITs Unveiled: A Comprehensive Guide for Investors.

How to Find the Best REIT Stocks.

Publicly Traded REITs vs. Non-Traded REITs: What's the Difference?

Real Estate Investing: How You Can Profit Now.


This post was composed by and provides the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jim Small is the Founder/CEO of Sante Real Estate Investments, an impact-based property business. For over ten years, he has actually partnered with ultra-high-net-worth individuals and household workplaces to obtain and handle thousands of multifamily properties throughout the U.S. and Europe, producing consistent returns and positive social impact.

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